I write about how technology shapes society, and vice versa. In addition to blogging for Forbes, I cover tech policy for Ars Technica. I'm an adjunct scholar at the Cato Institute and have a master's degree in computer science from Princeton. I live in Philadelphia with my wife and our two cats. There's more information about me on my website, including a comprehensive disclosure statement. Please follow me on Twitter. You can email me at contact@timothyblee.com. (I don't really like Google+ but I need to put my profile here to show up in Google search results)

Industry Concentration Can Retard Progress: Airlines Edition

I’m currently on a flight to the West Coast, and this is my first experience flying Virgin America, an airline that was only launched in 2007. In a country where the (non-Southwest) “major” airlines all have the same drab personality, Virgin is aggressively branded as a different kind of airline. And so far, they’ve lived up to the hype.

Like a lot of airlines, Virgin has small touch-screen displays embedded in the back of every seat. Unlike other airlines, this display is actually useful. You can watch a bunch of satellite television channels and rent on-demand movies. You can play video games—for free—using a controller/remote tethered to the armrest. And most interesting to me, you can use the touch-screen interface to order food and drinks. Some drinks are free. For items that cost money, you pay by swiping a credit card in the built-in display. A few minutes later, a flight attendent comes by and delivers the requested items.

It’s a great idea. Passengers can order stuff whenever they want instead of waiting for flight attendants to make a pass through the cabin. Flight attendants are saved the hassle of wrangling credit cards, and they don’t have to take orders and then run back to the galley to grab food items.

Virgin has apparently had this system in place since its US launch in 2007. It’s a fairly straightforward idea that shouldn’t be hard to copy, especially on airplanes that already have seat-back displays installed. Yet I have yet to fly on any other airline that does this.

There’s a broader economic lesson here. There’s a strand of economics that holds that the structure of firms doesn’t matter very much because firms will respond to market incentives regardless. This school of thought likes to cite the “Coase theorem” (scare-quoted because Coase doesn’t agree with “his” theorem) as holding that as long as property rights are clear, firms will bargain to an efficient allocation of resources.

Yet Virgin’s competitors seem to be seeing a $20 bill on the sidewalk and not picking it up. I don’t know if this is a function of executive cluelessness, bureaucratic inertia, or more complex implementation challenges. But in any event, it’s clear that airlines are bad at IT innovation. Even Virgin’s industry-leading technology is a straightforward application of technology of technology that has been around for 15 years.

This insight is relevant, for example, in patent policy. As Tim Wu has pointed out patents centralize control over innovation. Theoretically, that shouldn’t affect the pace of innovation since firms can license the technologies they need, but when you introduce the “transaction costs” of patent searches, licensing negotiations, and litigation, things don’t always work out well.

Similarly, a key argument for blocking AT&T’s acquisition of T-Mobile blocked was that excessive wireless industry consolidation could pose a threat to innovation. Not only are a few large wireless firms likely to innovate less than a larger number of small firms. But more importantly, a concentrated industry has more leverage in negotiations with vendors like Apple and Samsung that operate in more competitive markets. The more concentrated the wireless industry is, the more likely Verizon and AT&T, rather than Apple and Google, will call the shots in the mobile industry. The Baby Bells aren’t quite as clueless as United and American Airlines, but I think we’re much better off with Tim Cook and Larry Page driving the development of the smartphones.

Update: A reader emailed to point out that upgrading an airplane is invariably a slow process. Airplanes are extremely expensive, so grounding them for the few weeks it takes to upgrade their interiors is an expensive proposition. Such upgrades also require a new round of testing to make sure that the changes (such as an increase in weight) does not compromise safety. As a result, he argues, it’s not at all surprising that few airlines have followed Virgin’s lead, since most airlines simply haven’t had a major upgrade to their planes since Virgin entered the market in 2007.

This is a great point, and I shouldn’t have cast aspersions on the airlines for their slowness to copy Virgin’s innovation. But in a sense I think this underscores my broader point. Some industries are structured in ways that allow them to innovate rapidly. Others are structured in ways that hamper rapid innovation. There may not be a practical way to put Apple or Google in charge of the seat-back displays in airplanes. But in other sectors of the economy, public policy does have the opportunity to affect which firms control which portions of the “innovation stack.” All else being equal, vesting power in decentralized and competitive sectors of the economy is going to work better than centralizing power and hoping vertically integrated firms will innovate.

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